As­set Man­age­ment of Pen­sion Funds

Last spring, Arion Bank published the Pension Book. In it, Hjörleifur Arnar Waagfjörð, Head of Institutional Asset Management at Arion, discusses asset management for pension funds. Those who manage pension fund assets carry a significant responsibility and must always protect the interests of their clients regardless of other interests, including their own.

The full article can be read below.

Asset Management for Pension Funds

Much has changed in asset management for Icelandic pension funds over the past decades, with considerable progress. The industry has grown, and it's safe to say that the operating environment has been both challenging and volatile, but fortunately overall rewarding.

About twenty years ago, the author began working at Kaupþing in asset management for pension funds. The privatization of banks had recently been completed, followed by a remarkable boom and growth of the financial system in a small nation that lasted for a short time. The financial sector, including asset management, attracted many young university-educated professionals, and the asset management of Icelandic pension funds was not as extensive as it is today. Outsourcing asset management, either partially or completely, was a common arrangement for pension funds, often to more than one asset manager. Since then, much has changed. Asset management at financial companies has strengthened, specialization has increased, and many Icelandic pension funds have built up robust and well-staffed in-house asset management alongside significant growth of the funds. Experience has accumulated in Iceland, new talent has entered the field, and financial products that were once considered novel are now commonplace.

Responsibility of Asset Managers

Entities that manage pension fund assets, whether within pension funds or as outsourced providers, bear multifaceted responsibilities. One of the most significant responsibilities is fiduciary duty. This concept refers to the obligation of asset managers, who make decisions on behalf of their clients, to consistently protect the interests of those clients regardless of other interests, including their own. When outsourcing asset management to financial or asset management companies, fiduciary duty is extremely important as there can be many points of contact with the outsourcing provider, creating risk of conflicts of interest. In such cases, the role of the outsourcing provider, in accordance with laws and regulations, is to take measures to prevent conflicts of interest from causing harm to the pension fund.

Outsourcing Asset Management

Most pension funds still choose to partially or fully authorize domestic and foreign asset managers to manage their funds. However, outsourcing of asset management is increasingly moving toward more specialized funds and others that employ management methods that pension funds find more difficult to implement themselves. Examples include investments in funds that are permitted to use leverage and/or derivatives, private equity funds, infrastructure funds, specialized bond funds, and funds that invest in venture capital. In the domestic market, the use of traditional equity and bond funds has decreased from previous levels, and the proportion of individual securities has been growing. In foreign markets, however, most Icelandic pension funds still choose to use funds for most or all of their investments in stocks, bonds, or more specialized investments such as private equity, infrastructure, real estate investments, and specialized bond investments. Due to the scale, specialization, and comparative advantage in foreign financial markets, it can be concluded that this will largely remain the case for the time being.

Undoubtedly, it will be exciting to follow the development of asset management in Icelandic pension funds in the coming years. Many factors will likely have an influence, such as continued expansion of the asset universe and increased diversity and broadening of it both domestically and abroad, changes in investment permissions, increased proportion of foreign assets, and shifts in investment objectives. Last but not least, it will be interesting to watch new capable individuals take over from previous generations who have worked in asset management.